Stress Tests and the Countercyclical Capital Buffer: the UK Experience
Both the U.S. and U.K. have instituted a countercyclical capital buffer (CCyB) since the crisis, though the U.K. has managed theirs much more actively. This paper discusses the ways in which the Bank of England’s Financial Policy Committee use the results of the stress tests to inform their decisions about the level of the CCyB. In particular, the CCyB was raised to one percent in early 2016, partly based on the 2015 stress test results, but later cut to zero as financial risk began to materialize after the Brexit referendum. The CCyB was later raised to one percent again as financial conditions eased apart from Brexit.
Predicting Consumer Default: A Deep Learning Approach
Household borrowing has grown dramatically since the 1980s, increasing the effect of consumer default on the economy. This paper proposes a deep learning approach to predicting consumer default that relies on the same data and targets the same outcome as standard credit scoring models. The deep learning method improves the transparency and accuracy of default predictions and could be used to formulate economic models of consumer default.
Globalization and the Geography of Capital Flows
In light of the global financial crisis, advanced economies have supported attempts to better understand cross-border capital flows and investment. This note studies the shortcomings of the commonly used official balance of payments (BoP) framework, which accounts for cross-border flows using legal residence. The author takes the U.S. cross-border portfolio as a case study, illustrating how multinational firms’ practice of strategically locating subsidiaries in low-tax jurisdictions leads the BoP framework to return distorted measures of economic exposure.
Regulating the Doom Loop
Banks are exposed to sovereign risk and governments are exposed to bank risk: during a crisis this “doom loop” can have devastating effects on financial stability. While post-crisis reforms have mitigated the exposure of governments to bank risk, bank regulation still treats sovereign debt as risk-free. This paper models the response of banks to proposed reforms, finding that none of the reforms would lead banks to both reduce portfolio concentration and exposure to sovereign credit risk.